Once you have determined that you are entitled to claim a deduction for business use of your home, you then need to determine the allowable deductions that are related to your business, and the use of your home.
So what household expenses are deductible? To make this determination it is necessary to separate your household expenses into three categories;
1) Expenses that are not related to your business use.
2) Expenses that are indirectly related to your business.
3) Expenses that are directly related to your business.
Let's eliminate one category right away. Expenses that are totally unrelated to your business are not deductible, therefore these expenses need to be treated as personal expenses. In general I would state that all expenses directly related to your business would be deductible. Also, the business portion of indirectly related expenses would be deductible. I might caution you that because of limits placed on deductions for expenses that pertain to your business, you may find that even directly and indirectly related expenses could be disallowed. I won't go into this here, but you could research what limits are placed on deductions to make a determination in your situation.
I should explain what a directly related expense is. These would be the expenses incurred in your home that benefit only the business portion of your home. This would be for the area used exclusively for your business, and only for the business area. An example would be new carpet only in the area used exclusively for business, or painting the area.
Directly related expenses are fully deductible but are subject to a limit based on the gross income of the business . If a direct expense is for the purchase of property that will be used for more than one year (furniture), the cost must generally be depreciated over a number of years.
Ok now let's discuss indirectly related expenses. These are the expenses that you incur in maintaining and running your entire home.
These expenses benefit both your business and personal portions of the home. You may use the business portion of these expenses to calculate the home office deduction.
Indirect expenses include such items as:
1. Real estate taxes;
2. Deductible mortgage interest;
3. Rent;
4. Utilities and services;
5. Insurance; and
6. Depreciation.
Special rules apply to determine the deductible amount of some indirectly related expenses. You should research these special rules.
Expenses for utilities and services (e.g., electricity and trash removal) must be allocated between the deductible business portion and the nondeductible personal portion of the expense. The business portion of these expenses can be based upon the percentage of the home that is used for business.
The basic local telephone charge, including taxes, for the first telephone line into your home is a nondeductible personal expense So if you only have one telephone line into your home, you may not claim any deduction for charges that are required to obtain local telephone service, even if you are able to prove that the line is used 100% for business reasons. Charges for optional services such as call-waiting, call-forwarding, three-way calling, or extra directory listings are deductible if a business purpose can be established. In addition, charges for long-distance calls or payments for a service that permits you an unlimited number of calls to or from persons that live outside your local area are deductible, even if they are on the first telephone line, provided that you establish a business purpose for them.
Business calls made on a second line in the home and/or from a cellular telephone used exclusively for business would generally be fully deductible. Deductible telephone expenses are not part of the office-in-home expenses. Instead, they are deducted as part your other ordinary and necessary business expenses.
Home owners insurance can be tricky. If your home insurance provides coverage beyond the end of the tax year, the IRS position is that the you may currently deduct only that portion of the premium that provides coverage on the business portion of the home until the end of the year. The remaining portion would be claimed in the next year.
The next topic should be the depreciation of your home. To do so there are some things you need to determine. You will need to determine the percent of business use of your home, the month and year that you first satisfied the tests for deductions and the adjusted basis and fair market value of your home at the time you first qualified for the deduction.
The basis for depreciation is the lesser of:
1. Your basis (i.e., cost plus capital improvements minus any casualty losses) in the home on the date that the individual became eligible for the deduction; or
2. The fair market value of the home on that date.
Unrelated expenses are those that benefit only the portions your home that are not used for business reasons. Unrelated expenses include such costs as lawn and garden care, and repairs to the non-business areas your home. Unrelated expenses are not deductible as part of your office-in-home expenses.
So now you have general information on what to deduct for your office in home. This article is not intended to be a complete review of office in home deductions, and you should research further as needed. For instance, if you are a child care business, you have some other rules to follow.
Please use this information with other resources available to make a good sound determination of what you should be deducting in your situation.
I am a professional income tax preparer with over 20 years of experience. I want to share my knowledge with others and choose to do so by writing articles on various tax subjects that I know are of interest to many taxpayers. My website is http://www.jjackson328.com
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